This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
When people retire, they typically live off their savings and investment (e.g. in pensions) over many years. It requires a lot of preparation. Costly mistakes can – and do – happen, often due to failure to understand how pensions work. In this guide, our team at Elmfield Financial Planning in Padiham, Burnley outlines some of the most common retirement mistakes people make in 2022 – together with ideas on how to avoid them.
We hope this is useful and please get in touch if you’d like to discuss your own financial plan with us over a free, no-commitment consultation.
#1 Relying on the government
Many people assume that the government will pay for their lifestyle in retirement – much like it tries to meet their healthcare needs via the NHS. There are certain state benefits available to qualifying pensioners (e.g. if you have a disability), and the full new State Pension provides £185.15 per week. However, these income sources are unlikely to meet your expenditure needs on their own when you retire. You will almost certainly need your own savings as well, such as those contained in workplace pensions and perhaps also private pensions.
#2 Relying on your home
Those paying off a mortgage may assume that their home – when eventually paid off – can be used to help provide a retirement income in the future (e.g. using equity release). Whilst equity release can be helpful in some cases, focusing your wealth in property is a high “diversification risk”. By putting all your eggs in one basket, your retirement is placed more at the mercy of the property market (which may not be favourable to you when you eventually want to stop work). Instead, using tax-efficient investing “vehicles” – like a Lifetime ISA or pension – allows you to invest in a wide range of asset classes and spread out your risk.
#3 Relying on inheritance
Will a future inheritance be able to fully cover your retirement expenses? Research by Just Group suggests that the average UK adult expects to receive £130,000 one day from deceased relatives. However, according to the Office of National Statistics (ONS), the average (median) inheritance in the UK is close to £11,000.
Whilst individuals from wealthier families may have a higher chance of inheriting larger sums of money, few can rely on an inheritance to meet their future retirement needs. After all, what if a parent or other relative makes a mistake on his or her will, resulting in a larger than expected inheritance tax (IHT) bill? Or, what if a recently-widowed mother later remarries and wants to give more of her estate to her new husband and his children (rather than her own)? Given that none of us knows the future, it is usually better to see an inheritance as a welcome “bonus” to your existing retirement plan – rather than relying on it.
#4 Relying on work and pensions, simultaneously
Many people, understandably, want to retire “gradually” – perhaps moving to part-time work whilst starting to draw from their pension(s) to replace the lost salary. This is perfectly fine but doing this has a big impact on how much you can continue putting into your pension.
Usually, you can contribute up to £40,000 per year into your pension pot(s) – or, up to 100% of your earnings (whichever is lower). This is called your “annual allowance”. However, when you move your pension pot money into flexi-access drawdown and start to take an income, this triggers the “Money Purchase Annual Allowance” rules (MPAA).
The MPAA reduces your annual allowance to £4,000 per year and cannot be undone, so you need to be sure this is the right decision before accessing your pension. Speak with a financial adviser to make sure you do not inadvertently trigger the MPAA before you are ready.
#5 Relying on your workplace pension
Certain workplace pension schemes are very competitive and are usually worth holding onto. The Teacher’s Pension, for instance, offers a “high” employer contribution of 23.68% (most employers are required to contribute at least 3%) and uses a “defined benefit” model, which provides a guaranteed lifetime income to members in retirement.
However, many workplace pensions work on a “defined contribution” model where both the employer and employee build up a pot of money, over time, for the latter to use in retirement. The contributions are usually invested in certain funds offered by the scheme (e.g. a FTSE 100 tracker fund) to try and grow the pension pot value.
The funds on offer may not be the best value in terms of fees and/or performance. Additionally, the employee might not have the right balance of equities to bonds in their portfolio – leading to an investment strategy that is either too “cautious” or too “aggressive” given their investment horizon, financial goals and risk tolerance.
Rather than simply relying on your workplace pension, consider speaking to a financial adviser about whether there may be better options in the wider pension market. You never know, you may end up with a “cheaper” provider with a higher number of potential funds to invest in (which also involves cheaper fees without compromising on fundamentals).
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
